How to Avoid a Salary Dispute

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There will come a time when an employee unexpectedly asks for a raise, or you find yourself in a salary dispute. Whether or not you're able to meet their request, it's important to make sure your conversations are productive. This can mean the difference between an engaged employee and a disgruntled one.

In a tight labor market, where employers across many industries struggle to attract and retain top talent, small business managers can't afford to lose key employees over salary disputes. Here are some tips for avoiding these difficult situations.

Draw on HR Experience When Available

The human resources (HR) department — if your company has one — can be a good resource in these scenarios. "The moment a manager gets the impression a conversation may be turning toward salary, he or she should have initial discussions with company HR to ensure the correct process or procedure is being followed," says Robin Schwartz, managing partner at MFG Jobs.

The HR department typically has access to information on prevailing wages, by position, industry and geography. This can help to indicate how reasonable the employee's request may be from a market standpoint. There are also online resources that can be used to evaluate the average salary for a specific role, such as the website PayScale.

Focus on Value

Paul Koger, head trader and founder of Foxytrades, has been asked for a raise many times. His solution: Find a way to assess the amount of value the employee is bringing to the company. This may be easier to do for some positions (e.g. sales staff) than for others (e.g. administrative staff). In some cases, he says you need to do a rough calculation.

The idea, though, is that "when they bring a significant amount of value compared to what you pay them, including tax, you should give them the raise when they ask," Koger notes. In an effort to focus on value, he constantly monitors his employees for the amount of value they bring to the company, and tries to provide raises before people start to ask for them.

Being proactive is important. "I know from my own experience that asking for a raise is a daunting task," says Koger. "Some people are afraid to do it and quietly look for a new place of employment instead."

Schwartz agrees that a focus on value — as opposed to years of service, for instance — is a good starting point for discussion when it comes to a salary dispute. She also suggests asking employees to validate their requests by providing examples or data to show their productivity or success. "Raises being requested solely on the grounds of years of service, or what someone else is being paid, lack the support that a request based on proven successes [deserves]," Schwartz says.

Remember to Listen

While salary increase requests can, understandably, create angst for some employers and managers, it's important to remain non-defensive and to listen carefully to the employee. Understanding what's important to them may help you find solutions that don't involve an increase in pay, according to Adam Juda, a consulting economist with TapRun Consulting. "Often, less costly intangibles, like the ability to work from home one day per week, an increase in autonomy or a shift in responsibilities can prove just as desirable to employees anxious to improve their quality of life," says Juda.

Finally, try to take a proactive approach to salary issues, as Koger suggests. Your employees will be more motivated when you recognize the value they provide before they have to ask you to do so. As the labor market continues to change and fewer individuals are available to replace exiting employees, being proactive can pay big benefits.